after the missile attack on Poland, is another black swan about to happen?

What is a black swan event in the markets, want an example.

What Is a Black Swan?

A black swan in this context is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.


Black swan events are characterised by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight. Like in nature, black swans are rare.


In world events a black swan is an extremely rare event with severe consequences.

It cannot be predicted beforehand, though after the fact, many claim it should have been predictable.

Black swan events can cause catastrophic damage to an economy by negatively impacting markets and investments, but even the use of robust modelling cannot prevent a black swan event.

Reliance on standard forecasting tools can both fail to predict and potentially increase vulnerability to black swans by propagating risk and offering false security.


Understanding a Black Swan

The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader. Taleb wrote about the idea of a black swan event in a 2007 book prior to the events of the 2008 financial crisis. Taleb argued that because black swan events are impossible to predict due to their extreme rarity, yet have catastrophic consequences, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to try to plan accordingly.


According to Taleb, the three traits of a black swan event are:

Rarity – i.e. Unpredictable Outlier

Results in Severe Consequences

Rationalized Post-Occurrence – i.e. Retrospective Bias


Some believe that diversification may offer some protection when a black swan event does occur.

What Is Diversification?

Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk.


Examples of Past Black Swan Events


The crash of the U.S. housing market during the 2008 financial crisis is one of the most recent and well-known black swan events. The effect of the crash was catastrophic and global, and only a few outliers were able to predict it happening.


Also in 2008, Zimbabwe had the worst case of hyperinflation in the 21st century with a peak inflation rate of more than 79.6 billion percent.

An inflation level of that amount is nearly impossible to predict and can easily ruin a country financially.


The dotcom bubble of 2001 is another black swan event that has similarities to the 2008 financial crisis. America was enjoying rapid economic growth and increases in private wealth before the economy catastrophically collapsed. Since the Internet was at its infancy in terms of commercial use, various investment funds were investing in technology companies with inflated valuations and no market traction. When these companies folded, the funds were hit hard, and the downside risk was passed on to the investors. The digital frontier was new, so it was nearly impossible to predict the collapse.


Another example, the previously successful hedge fund Long-Term Capital Management (LTCM), was driven into the ground in 1998 because of the ripple effect caused by the Russian government's debt default, something the company's computer models could not have predicted.


A more recent example could be the emergence of the COVID-19 virus that caused a global pandemic beginning in the Spring of 2020, and which disrupted markets and global economies around the world.


What Is a Black Swan Event in the Stock Market?

A black swan event in the stock market is often a market crash that exceeds six standard deviations, making it exceedingly rare from a probabilistic standpoint. Some have argued that stock prices are "fat-tailed" and that such events are more frequent than the statistics would let on.


Why Do They Call It a Black Swan Event?


A black swan is rare, since most swans are white. In fact, the story goes that black swans were thought once to not at all exist, until finally one was discovered. The lesson is that what we think are very rare events may be more common than previously thought.


What Is a Grey Swan Event?

A grey swan event is an outlier, but which is more probably than a black swan. As a result, people can better prepare for and hedge against a grey swan than for a black swan.